Stock Market Uncertainty and Business Optimism in Major Emerging Economies

With the rapid growth of emerging economies in recent years and their significant contribution to world economic activity, how leading emerging economies such as Brazil, China, Greece, India, Russia, South Africa, and Turkey respond to domestic stock market shocks and stock market uncertainty is a question of utmost importance. We estimate the interdependence between investor sentiment and real stock prices, in the context of a structural vector autoregressive model modified to accommodate GARCH-in-Mean errors and a structural VAR where we identify the model using a combination of short-run and long-run restrictions after addressing the simultaneity problem between business optimism and stock prices. We provide empirical evidence that higher uncertainty about the future path of real stock prices in general has a negative effect on business confidence in emerging economies.